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High-deductible medical plans take hold in workplaces

RALEIGH, N.C. - It happened almost 25 years ago, but John McDonnell remembers the day he told his father he didn't need to invest in some new retirement gimmick called a 401(k) plan.

A recent college graduate with a degree in marketing and accounting, McDonnell had done the math. After 35 years of work with his first employer, Blue Cross of Connecticut, McDonnell figured he would be sitting pretty with a nice, fat pension.

McDonnell tells this story to make a point. As a partner in Progressive Benefit Solutions of Raleigh - his fourth employer - he thinks that health insurance coverage is headed the way of the company pension plan.

He is introducing people to high-deductible, tax-free, investment-driven health accounts. Think of them as the 401(k) of health care coverage.

Not everyone agrees with McDonnell's predictions. The growth of the plans, known as health savings accounts, have failed to match the hype since they were introduced in 2003.

Just the deductible - the amount employees pay before coverage kicks in - scares some people away. Many plans set the deductible at $2,000 for individuals and $4,000 for family coverage.

The plans also require that employees learn a new set of rules about how insurance works - which is enough in itself to kill some workers' interest.

But if people sign up and agree to spend their own money first, industry experts say, competition and scrutiny will help hold down costs.

"If you're spending your own money, you spend it quite differently than if you are spending someone else's money," said Steve Graybill, a senior benefits consultant for Mercer Human Resource Consulting in Charlotte, N.C. "That's the whole premise of consumerism."

Health savings accounts

A recent survey by the Kaiser Family Foundation shows that as many as 25 percent of employers nationally are likely to offer high-deductible plans in 2008. With open enrollment periods about to begin at many companies, McDonnell thinks local numbers could be much higher.

Gary Claxton, who co-wrote the 2007 Kaiser Foundation survey, said corporate interest is understandable. Most companies offer coverage through health-maintenance or preferred-provider organizations. However, like employees, they are absorbing higher costs each year, Claxton said. If they want to hold costs steady, the default choice is a health savings account.

"It is still their only new thing to offer, maybe with the combination of wellness programs," Claxton said. "So we're going to see a push for this for the next couple of years."

How does the plan work?

Although rules vary by plan, health savings accounts are based on a basic concept.

Employees are required to set up an account in their own name, similar to a 401(k) account. In most cases, the money that goes into that account comes directly from an employee's paycheck, without being taxed.

Once the paperwork is done, deposits and allocations are automatic.

Employees are free to invest the money in mutual funds, money markets or whatever options the company plan offers. That means the value of the account can rise or fall with the market, just as it does in a 401(k).

The money remains tax-free throughout, including any earnings and withdrawals. It can be used only to pay for medical expenses, and there are limits on how much can be invested in a year.

Unused money can be carried over from year to year, which eliminates the need to guess how much you will spend and risk losing your money if you set aside too much.

Although they could establish an account independent of an employer, most consumers aren't aware of the option until their company offers it, McDonnell said.

If all of this sounds a bit generous, pay attention to the rest of the rules.

With some exceptions - such as physicals and other preventative care - workers pay all medical costs, up to the limits of their deductibles. That includes emergency room visits, prescription drugs and unexpected hospital admissions.

Although most accounts require annual deductibles of about $2,000 for individuals and $4,000 for families, there are other costs. Of those using the plans, the Kaiser survey, found maximum out-of-pocket limits were typically about $3,100 for individuals and $6,500 for families each year.

Employees still pay monthly premiums, as do employers. The combined average cost of high-deductible plans in 2007 is $10,693 a year, with companies picking up the bulk of the cost, according to the survey.

Although this consumer-driven approach is supposed to hold down costs, annual increases in premiums and deductibles are expected.